Thoughts on the Evolution of Stablecoins & DEX Repositioning

MakerDao added a BAT mortgage asset incident, which once again involved the debate between decentralized stablecoins and centralized stablecoins. Centralized stablecoins are generally issued jointly by exchanges and institutions. For example, Bitfinex and Tether jointly issued USDT, and Binance and Paxos jointly issued BUSD. However, there is a problem of unclear separation of funds - the exchange not only has daily access to users' funds stored on the platform, but is also very likely to get involved in the underlying assets of stablecoins when extreme situations occur.

A well-known example has torn off the fig leaf of the exchange funds for us—Bitfinex embezzled Tether’s reserves for redemption of USDT to make up for the $850 million fund gap caused by the freezing of the exchange account by the US government. This is a typical behavior of stablecoin users paying for exchange users. Although the two user groups have a large degree of overlap, they cannot be regarded as one in terms of benefit distribution. Therefore, in order to avoid the problem that the underlying funds of stablecoins cannot prove their innocence, many exchanges will regularly issue audit reports through third-party custodians. For example, for the USDK jointly launched by OKLink and Prime Trust, the US audit company Armanino regularly issues fund audit reports.

Integrating a regular audit by a third-party auditor is basically the greatest transparency that a dollar-pegged stablecoin can achieve. For Makerdao, a decentralized stablecoin anchored to tokens, anyone can conduct a real-time audit of the underlying asset ETH stored on the chain at any time. Makerdao has almost no room to touch the underlying assets of the stablecoin. There is a complete separation between the asset and the issuer. But the problem is that ETH currently lacks a value measurement standard, and the price is more likely to rise and fall. But it is undeniable that decentralized stablecoins have indeed solved the problem of transparency to a large extent. This is where the advancement of Makerdao lies. The emergence of Dai provides users with a variety of possibilities in the choice of stablecoins.

Centralized stable currency: centralized issuance + third-party audit (the exchange rate of the underlying asset USD is stable)

Decentralized stable currency: Anyone can audit at any time and in real time (the underlying asset tokens are highly volatile)

Similarly, for the large amount of user funds deposited in the exchange, as the general trend of compliance advances, it will be gradually separated from the exchange and handed over to a compliant third-party custodian for management. This is to prove that although the assets are placed on the exchange, they are still owned by the user. In extreme cases, the user can withdraw cash smoothly when a run occurs. Given the current unclear compliance environment, many exchanges have made phased compromises to provide users with "holding rebates" services - as long as they hold coins on this platform, they can receive interest on a periodic basis. For example, OKEx launched monthly staking rebates for ALGO and other tokens. For the exchange, since it is impossible to prove its innocence on "whether the user's assets have been misappropriated", it is better to openly and honestly give users interest. Of course, the wool comes from the sheep, and the interest apportioned to users comes from the platform’s income from staking with users’ POS tokens. However, being able to admit it frankly and share a piece of the pie with users can be regarded as the self-cultivation of contemporary exchanges. up.

Having said that, it is better to mention the value of the decentralized exchange (DEX). At present, there are many DEX products on the market, but the transaction volume has not been large. This is because of problems in product design and positioning. The industry often compares decentralized exchanges to centralized exchanges, and then criticizes its matching efficiency, order depth and other issues. The author believes that DEX is not so much an exchange as it is a "token swap tool". It should really target the dark pools in the traditional financial market.

Centralized exchange: exchange custody of user funds + position rebates → fund isolation custody + third-party regular audit

Decentralized Exchange: Token Swap Tool.

We all know that the depth of centralized exchanges is difficult to support large transactions, and many large accounts can only meet their trading needs through off-exchange trading, which can help large accounts quickly complete transactions with lower slippage. To make a digression here, as far as the exchange itself is concerned, large orders are obviously not welcome, and it is easy to cause an impact on the market, especially for derivatives, which is likely to cause unexpected liquidation losses to users . Therefore, similar to exchanges such as OKEx, a series of market price stabilization mechanisms have been introduced in derivatives, such as price limit rules, forced liquidation, forced liquidation, gradient margin and other mechanisms to avoid market fluctuations caused by large orders.

Back to the topic of DEX’s tool attributes, let’s continue to look at over-the-counter transactions. Over-the-counter transactions include two parts - fiat/currency transactions and currency/currency transactions. For the former, most of the industry is completed by the OTC Desk endorsed by the exchange; for the latter, there is still a lack of a trusted third party, and DEX can just make up for this problem. Provide services.

The author's hypothetical solution is as follows:

Users of both parties communicate offline in advance about the transaction, and after reaching a consensus on the transaction, one party sets restrictions on the DEX such as transaction time, transaction currency, transaction exchange rate, transaction quantity, etc.; the other party sets a matching reverse transaction. Note that the transaction time can be a range, but the transaction currency and transaction quantity need to be accurately matched to complete the transaction, so as to prevent wrong transactions by other users, and give full play to the characteristics of the dark pool transaction in the traditional financial market that can choose the counterparty.

For example, user Alice initiates the following transaction:

Trading time: 12:00pm-12:10pm

Transaction currency: A Token ⇌ B Token

Transaction exchange rate: 1:2 (1 A for 2 B)

Transaction Quantity: 100 A

User Bob initiates the following transaction:

Trading time: 12:00pm-12:10pm

Transaction currency: B Token ⇌ A Token

Transaction exchange rate: 2:1 (2 B for 1 A)

Transaction Quantity: 200 B

For the user, what is perceivable is to set the above four parameters, and the parameters can be matched to complete the transaction. Theoretically speaking, users can initiate swap requests for any currency, any quantity, and any exchange rate according to their needs. Of course, it also includes unlisted tokens that do not have a fair price reference, as long as the parties to the transaction reach a consensus. This type of transaction once again brings a new living space for brokers.

DEX, positioned as a "token swap tool", is different from non-tool products competing for users' attention in the same industry competition. Tool products do not need to be sticky, as long as they meet the needs, users can leave after using them, and they can still remember them when they use them. It's a very good product.